Heritage Insurance Holdings, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results; it is not a standalone quarterly filing. Heritage is a property and casualty insurer focused on residential property coverage across multiple coastal states.
Business context and key financial metrics
- Growth: Gross premiums written rose 15.2% to $1.08 billion; net premiums earned increased 13.8% to $544.7 million. Policies in force grew 9.2% to 581,046, and annualized premium in force was approximately $1.1 billion. The company entered California, Delaware, Maryland and Mississippi during 2020.
- Revenue and earnings: Total revenue was $593.4 million, up 16.1%. Operating income fell to $10.2 million from $49.6 million; net income declined 67.4% to $9.3 million, or $0.33 per diluted share, from $28.6 million, or $0.98 per share.
- Underwriting: The net loss and LAE ratio increased to 68.5% from 57.1%; the net expense ratio improved to 38.5% from 39.4%. The net combined ratio rose to 107.0% from 96.5%, indicating an underwriting loss before investment and other income. Net current-year weather losses were $134.2 million versus $75.9 million, including $83.5 million of catastrophe losses.
- Investments and cash flow: Net investment income was $12.3 million, down from $14.4 million; net realized and unrealized gains were $22.4 million versus $4.2 million. Cash from operations was $170.2 million, compared with $119.7 million. At year-end, cash and cash equivalents were $441.0 million, restricted cash was $5.4 million, and investments totaled $589.0 million.
- Balance sheet and debt: Total assets were $2.09 billion and stockholders’ equity was $442.3 million, versus $1.94 billion and $448.8 million, respectively, in 2019. Long-term debt, net, was $121.0 million; principal outstanding was $124.4 million. Credit-facility borrowings accrued at 3.475% at year-end, and the facilities mature in 2023.
Changes, outlook and management commentary
- Growth in premiums reflected expansion in existing markets and four additional states, as well as rate increases, particularly in Florida. Ceded premiums increased 1.5% to $452.1 million; the ceded premium ratio improved to 45.4% from 48.2%.
- Higher weather-related losses drove the increase in the loss ratio and the combined ratio above 100%. Favorable prior-year reserve development of $19.6 million partly offset current-year losses; 2019 also had favorable development, of $3.7 million.
- The $7.1 million income tax benefit reflected the CARES Act five-year carryback of the 2020 tax loss to years with a higher tax rate. The filing does not provide numeric earnings or premium guidance. Management said it believed available cash, its revolving facility and expected earnings were adequate for at least the next 12 months.
- Management reported virtually no material business impact from COVID-19 in 2020, while identifying possible future effects on new business, agency distribution, premium collections, investment values and liquidity if economic conditions worsened.
- For the June 2020–May 2021 catastrophe program, Heritage reported approximately $2.6 billion of potential coverage for multiple events and estimated program cost of $272.1 million. Coverage depends on event severity and frequency; Heritage remains liable for losses above available reinsurance. Reinsurer nonpayment and FHCF funding capacity are also risks.
- Other material risks include coastal catastrophe exposure, reserve estimation uncertainty, Florida litigation and assignment-of-benefits claims, reinsurance availability and pricing, regulatory limits on rates and dividends, and variable-rate debt and LIBOR transition risk. The audit identified unpaid-loss reserves of $659.3 million as a critical audit matter. The auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Quarterly detail and capital actions
In fourth-quarter 2020, net premiums earned were $151.4 million, total revenue $159.5 million, operating loss $5.1 million, and net income $2.8 million, or $0.10 per diluted share. For full-year 2020, the company repurchased 930,356 shares for $10.0 million and paid approximately $6.8 million in dividends. The board extended and increased the repurchase authorization to $50.0 million through December 31, 2021. A $0.06-per-share dividend payable in April 2021 was declared after year-end.
Important facts for investors to verify
- Whether loss reserves and reinsurance recoverables remain adequate as catastrophe claims develop; reserves were the audit’s critical audit matter.
- The economics and actual availability of the catastrophe program, including the stated $2.6 billion multiple-event coverage, subsidiary first-event limits, retentions, reinstatements and estimated $272.1 million cost.
- Whether rate actions and geographic diversification can improve underwriting results after a 107.0% combined ratio and elevated weather losses.
- Debt covenant headroom, liquidity needs and the impact of variable rates and the transition away from LIBOR; also consider restrictions on subsidiary dividends and parent-company cash generation.
- Capital return capacity and execution of the $50.0 million repurchase authorization, given catastrophe exposure and statutory capital requirements.